America's Bank: The Epic Struggle to Create the Federal Reserve

by Roger Lowenstein

  UNTERMYER: When Mr. Morgan gave the word, did that change the panic conditions?

  THOMAS: It certainly had a very decided effect upon relieving the situation.

  UNTERMYER: Then, it rested with one man to say whether the panic should go on or should end, did it?

  Spurred by Untermyer, the journalist Ida Tarbell zeroed in on one of the system’s weakest links: the New York Clearing House. Tarbell claimed that this private bankers’ club was “exercising power which it had been gradually gathering to itself.” It was ill equipped to provide security. Its authority was citywide, not national; it was not even universally subscribed to within New York and it dispensed its powers arbitrarily. “If Congress . . . had given us any good, wholesome currency legislation, such as they have in other commercial nations of the world,” Tarbell fairly screamed, recalling the desperate attempts to furnish paper IOUs in the last panic, “there would never have been any question of issuing Clearing House certificates.” Such arguments did not escape the attention of Congress.

  On March 4, 1913, Woodrow Wilson rode to the Capitol alongside William Howard Taft, a gracious loser. Soldiers had pushed the crowd away from the speaker’s platform, where they were nearly out of earshot. Wilson sent an aide with the instruction that the people could come forward: thus did progressivism govern. The biographer John Milton Cooper noted that Wilson was one of the last presidents to write his own speeches. His address, though brief, was full of fire and brimstone. Inveighing against the ruthlessness of business tycoons, he thundered, “We have been proud of our industrial achievements, but we have not hitherto stopped thoughtfully enough to count the human cost.” There has been, he added, “something crude and heartless and unfeeling in our haste to succeed and be great.” But with regard to his actual policies, the new president was reassuringly moderate. He wanted no draconian upheaval, just a “sober second thought.” Bankers in particular were soothed when he declared, “We shall restore, not destroy. We shall deal with our economic system as it is and as it may be modified, not as it might be if we had a clean sheet of paper to write upon.”

  Wilson was the first (and thus far, the only) president with a Ph.D. He entered office with a well-conceived agenda and a sure sense of the powers of the presidency. The Sixty-second Congress having expired, he opted to convene a special session, in April, to attack the tariff; the timing of bank reform was up for grabs.* Wilson was at least mildly distracted by the arrest and, quickly following it, the murder of the president of Mexico barely a week before he entered the White House. The violent revolution south of the border would dog him throughout 1913, as he tried to focus on his domestic program—a harbinger of the attention he would later devote to foreign affairs, specifically Europe. However, in March, Wilson put Mexico to the side and received Glass, together with McAdoo, and urged Glass to deliver a bill promptly. The congressman exited excitedly. “The prospect,” he reported to Willis, “is that the President, Mr. McAdoo and I will be in frequent consultation within the next few weeks, and I shall want to be well up on every detail of our bill.”

  Glass then urged Willis, who was revising their draft, to work in haste. For Glass, the interlude between legislative sessions was blessed. He did not have to consult with other members (his committee had yet to be reconstituted) and he could focus on the mechanics of how the system would work. He corresponded with the director of the U.S. Mint, who had a useful suggestion (urging that private banks be integrated into the new system through an exchange of their gold for reserve notes) and who became an ally of Glass within the administration.

  As usual, Glass and Willis were busy fending off perceived threats. Willis warned Glass that McAdoo, when building his Hudson River tunnels, had received financing from Kuhn, Loeb (Warburg’s firm) and was said to be in Warburg’s pocket. There is no evidence that this was true. Untermyer represented a darker shadow. The attorney attempted to relaunch the Money Trust inquiry; when this failed, Untermyer tried to get to Wilson by cultivating a relationship with Colonel House, who shared his taste for intrigue. Untermyer insinuated to House that the Glass bill would not solve the “vast” problem of concentration of credit—only, naturally, a bill that Untermyer had in mind would do that.

  House took an interest in the banking bill, and his diary refers to repeated meetings not only with Untermyer but with Wall Street bankers such as Jack Morgan, Warburg, and Vanderlip. He also took Glass on a carriage ride to discuss the legislation. All were eager to meet with House, as his intimacy with Wilson was well known.* But closeness did not necessarily translate to influence. At a “family affair” at the White House at which the Colonel shared fish, veal cutlets, rice, peas and potatoes, and ice cream with the Wilsons, he casually suggested that he and McAdoo “whip the Glass measure into final shape.” There is no evidence that Wilson endorsed this idea. House also conveyed a request from Henry Frick, the steel mogul, that the administration quietly resolve the government suit against U.S. Steel out of court. Wilson brusquely rejected this plea for corporate favoritism, replying that U.S. Steel should receive “the same consideration as any other, neither more nor less.” The President was at ease with the Colonel and relied on him for emotional support, but on banking and other financial matters McAdoo carried far more weight.

  Wall Street bankers, who had been spoiled by their warm relations with Taft, sensed that their influence in the White House was diminished. Vanderlip sourly complained that his “friendship” with Wilson did not seem to count for much. Jack Morgan opted to sell much of his firm’s stake in National City to forestall public criticism. It was a sign that, under the new administration, banks were on a shorter leash, particularly on matters where they might be suspected of wielding undue influence. As Morgan put it, “We all feel that it behooves us to pay more or less attention to public feeling of that kind.”

  Pierpont, the elder Morgan, had dropped from view since his appearance in Congress, embarking on a trip with family and friends to Egypt, where he was supporting archaeological treasure hunting. Nelson Aldrich and his family departed on the same boat as the Morgans. Lucy, the senator’s eldest daughter, reported, “We have been practically one party [with the Morgans] since we left New York and we have gone about seeing the ruins together.” Aldrich always had a taste for antiquities, perhaps never more than in his own twilight. In Cairo, the senator and Pierpont lunched with Lord Kitchener, the conqueror of Sudan. The families, glittering relics of the Gilded Age, traveled the Nile in a pair of private steamers, “stop[ping] at the same places.” However, Morgan was fatigued and depressed. By March, each family was in Rome. Aldrich bought a pair of marble sphinxes and two Persian bowls and proceeded to Monte Carlo. From his art dealer, he heard, along with details relating to the packing of his art, disquieting news. Morgan, who had remained at the Grand Hotel in Rome, was seriously ill. On March 31, updating Aldrich on his sphinxes, the dealer added: “Sorry to say that Mr. Morgan is not at all well and all sorts of rumors are afloat.” He died that day.

  Morgan’s passing symbolized the end of the era in which a single financier could hope to rescue the banking system. Walter Hines Page, Wilson’s new ambassador to Great Britain, immediately observed that “a revision of the currency and banking laws, if a wise revision be made, will prevent any other such career.” For one man to hold such power, Page correctly judged, “does not fit into the American scheme of life or business.” Vanderlip, too, sensed the portent in Morgan’s passing. “The king is dead,” began his letter to Stillman. “There are no cries of, ‘Long life the king,’ for the general verdict seems to be that there will be no other king; that Mr. Morgan, typical of the time in which he lived, can have no successor, for we are facing other days.”

  CHAPTER TWELVE

  THE “SLIME OF BRYANISM”

  The germinal principle of the bill appears to be distrust of banks and of bankers.

  —The New York Times, June 20, 1913

  The banks may be
the instruments, not the masters, of business.

  —WOODROW WILSON, before a joint session of Congress, June 23, 1913

  WHEN AMERICA last had a central bank, in 1836 (the year before J. P. Morgan Sr.’s birth), the country was a financial innocent. Its credit was borrowed in Europe; its stock market barely existed; its most common mode of transportation was the horse. The United States of 1913 was entirely different. The frontier had vanished; industrialization was a fact. Ford’s was churning out 170,000 Model Ts a year. The New York Stock Exchange listed more than three hundred companies, and corporate news was disseminated on glass-domed stock tickers. The banking industry had mushroomed, thanks in large part to the greater willingness of people to deposit their savings. The heady progress of finance was, however, an unfulfilled promise to the great wash of industrial workers. Capital in its formative stage was undemocratic. Workers’ pensions and other forms of savings were practically nonexistent. Leisure time was the province of the wealthy. America had far more banks than ever, but banks existed to serve business. Neither Carter Glass nor Paul Warburg would have understood the term “consumer loan.” National City Bank loaned against trade, not against the purchase of automobiles. Banks, of course, provided a trust service to the Aldriches, the Vanderbilts, and their ilk, distributing the dividends on their shares, balancing the books when the families were in Newport or London. The great exception—the one respect in which bankers trafficked with a wider public—was in mortgages, which were mostly rural mortgages, and these were a source of friction as much as fulfillment. National banks did not issue real estate loans, and credit from state banks was never ample enough; the farmer subsisted on the anxious edge of foreclosure.

  As far as rural and laboring Americans were concerned, banks belonged to privilege. If banking was to be reformed, people wanted a say in it, so that credit would be more widely distributed. Nelson Aldrich had approached reform as a technical puzzle whose solution could be engineered by competent experts. Carter Glass approached it as a political question. His task was to unite populist Democrats on one wing of the party with conservatives and businesspeople on the other. He counted on reform-minded bankers to be his allies. But bankers increasingly distrusted the Democrats and attached conditions for their support. They set a high price on collaboration. When Bryan Democrats attached their own conditions, a confrontation was inevitable.

  Three questions divided reformers: Who should issue the new currency? To what degree should the system be centralized? And should bankers or politicians be in control? Of the three, the first—the “money question”—will seem most puzzling to modern readers. Americans today think of “money” as paper that is minted by governments, but this was not always the case. A century ago, money—“notes”—still retained their ancient connection to credit. Notes were promises to be redeemed for coin or reliable securities, and who had more wherewithal to back up promises than banks, at least well-regulated banks? Governments had only the taxing power, which was considered unreliable. A 1910 tract asserted, “Currency should be based on credit which has real values back of it, and not on the credit of any national or local government.” The report of the Indianapolis Monetary Convention, in 1898, had gone even further, labeling government money a fraud, for it “educates the people who use it in false notions.” They begin to think of paper as “possess[ing] the virtue of money in and of itself.”

  Dissenters had often challenged the orthodox view, but never from a position of power. Now, however, William Jennings Bryan was secretary of state, with a loyal following among the majority in both houses of Congress. In particular, the chairman of the Senate Banking and Currency Committee, Robert Owen of Oklahoma (who had previously withstood a run on his bank), was a Bryan disciple. Owen, like Bryan, believed that government—not banks—should control the circulation of money. This view was heresy among conservatives, who equated government money with unrestrained issuance and inflation.

  The only person who could hope to reconcile such differences was Wilson. Thanks to the Democrats having elected 114 first-time congressmen, the President had an enhanced power to affect legislation. With so many newcomers, Wilson was in a position to dominate.

  Wilson launched his agenda early in April, addressing a joint session of Congress on the tariff. In typically soaring prose, he demanded that lawmakers abolish “even the semblance of privilege or of any kind of artificial advantage.” Wilson’s presence at the rostrum of the House of Representatives reversed a century-old custom by which presidents did not appear in Congress (Jefferson had considered it undemocratic, a practice too suggestive of English kings). Even Wilson was accused of mimicking royalty. In truth, his visit had a strategic purpose: he wanted to enhance the president’s personal authority. Wilson found a symbolic way to demonstrate his reach later in the month, when, sitting at his desk in Washington, he switched on the lights of the new Woolworth Building in New York. The fifty-seven-story gothic skyscraper—the world’s tallest—reaffirmed the mood of accelerating change. In May, Wilson claimed a substantive triumph, when the House passed the biggest tariff cut since the Civil War. Compounding the sense of galloping reform, the Seventeenth Amendment was ratified, mandating direct election of senators (an early Bryan idea come to fruition).

  Banking reform proceeded on a parallel, if less visible, track. Congress was eager to recess and avoid the Washington summer, but Wilson was adamant that the members stay in town to work on banking. The President delegated the administration effort to his Treasury secretary. Moving quickly, McAdoo mapped the country into districts, trying to position the reserve centers so that no bank would be more than an overnight train ride from a supply of cash. He worked closely with Willis, who was revising the latest draft. The two met on a Sunday at McAdoo’s home, and it is evident from Willis’s correspondence that he regarded McAdoo’s suggestions as close to commands. To attract votes from farm states, McAdoo inserted the secretary of agriculture on the central board, in place of the attorney general, who had no business being there. He also improved the bill’s nomenclature, changing “National Reserve Bank” to “Federal Reserve Bank.”

  However, McAdoo became frustrated with Glass and Willis’s secretive ways (it did not help that McAdoo developed a strong dislike for the prickly Willis). From McAdoo and others, pressure mounted on Glass and Willis to circulate a draft. In mid-April, McAdoo requested that Glass bring a copy of the bill to a Washington dinner party to which each man was invited. Promptly, the two got involved in a spirited discussion of it. As the evening ended, Colonel House, who was also present, asked if he could take the bill with him. Glass declined, saying it was his only copy. A few days later, Wilson ordered Glass to prepare a “digest” of the bill, which Willis did. This was the first crack in Glass and Willis’s veil of secrecy.

  House immediately conveyed Willis’s digest to Paul Warburg, requesting that the banker supply an analysis—within twenty-four hours! Once again, Warburg exploited the chance to gain influence. Working in a frenzy, he delivered thirteen pages of pointed suggestions. As before, he urged a reduction in the number of Reserve Banks (the Willis digest stipulated twenty) with satellite branches, if necessary, in more remote territories. The principle he advanced was of “a large number of faucets” but a small number of reservoirs. In an era in which physical proximity of money was critical, Warburg understood the need for multiple branches, but insisted that a pooling of reserves was critical to the system’s strength. Warburg also urged that state-chartered banks be allowed to join, so that the new system would be as inclusive as possible. To prevent banks from milking the system, he recommended that a ceiling be imposed on dividends. Warburg also suggested a reduction in reserve requirements.

  His paper, dated April 22, was unsigned, but Willis immediately recognized its author. Now almost finished with his second draft, Willis was incensed by this encyclopedic critique. While giving it careful study, Willis advised Glass that the Warburg paper was “vicious
” and also “extreme.” Such remarks can be attributed only to Willis’s monumental insecurities. Despite his sensitivity, however, most of Warburg’s points were adopted.* Warburg’s critique also served as a useful irritant in the waters. Previously, too little had been known—even in official Washington—for people to discuss the bill. Now, people had Warburg’s analysis to chew over. Not for the first time, the German stirred controversy and debate.

  Colonel House, who never missed an opportunity to stir the pot, stopped by McAdoo’s apartment when, as it happened, McAdoo and Willis were reviewing the Warburg paper. With an air of mystery, House took McAdoo into another room, to confer in private. This surely irritated Willis—who needed little encouragement to suspect a conspiracy. After fifteen minutes or so, House reappeared, grabbed the Warburg paper, offering the dubious excuse that he had yet to read it, and left.

  For as long as the bill remained secret, the process was subject to intrigue and to the interplay of personalities. Two days after the encounter at McAdoo’s apartment, on May 4, Colonel House was invited to Greystone, Untermyer’s estate north of New York City. Senator Owen, chairman of the Senate Banking Committee, had spent the night and was there as well. House presumably discussed what he knew of the Glass bill, and of Warburg’s critique of it—both of which were news to Owen. Partly due to differences with Glass, partly from annoyance at being left out of the loop, Owen around this time resolved to write his own bill. The eventual co-sponsors of the Federal Reserve Act were now in a race against each other.

  Coincidentally, Owen had been born in Lynchburg, Virginia, two years before Glass and a block from Glass’s birthplace. Part Cherokee on his mother’s side, he had the look of a statesman: tall with a swarthy complexion and black hair and dark eyes. Unlike Glass, Owen had been raised in a comfortable home, the son of a railroad president, but his father’s early death and the Panic of 1873 reduced the family to poverty. A gifted student, Owen attended Washington and Lee University on scholarship, where he was valedictorian. In 1879, he moved to Indian Territory (present-day Oklahoma), where he taught school to orphan Cherokees and was admitted to the bar, specializing in Indian claims. He briefly edited the weekly newspaper Indian Chieftain, and in 1885 he was appointed Indian Agent (a federal post) in Muskogee.